Historic MFH lake property in popular tourist town

[Jennifer Schelkopf]

Investment Info:

Large multi-family (5+ units) buy & hold investment in Hot Springs.

Purchase price: $200,000
Cash invested: $96,000
Sale price: $400,000

This is a 5-unit MFH in Hot Springs, AR. Property was nearly a hundred years old when we purchased it. It had been poorly maintained and needed significant repairs when we acquired it.

What made you interested in investing in this type of deal?

We expected to achieve great cash flow for the property by improving the property management. Here's what we roughly estimated:

Purchase price: $200,000
Repairs: $10,000
ARV: $330,000

Projected rent: $4,100
Gross income (not incl. P&I): $3,000
Cash flow (incl. P&I): $2,000

These numbers were wildly inaccurate. The property needed significantly more repairs and capital expenses than we estimated.

How did you find this deal and how did you negotiate it?

A family member asked us to purchase the property, as they were struggling to make it profitable. At the time we believed we were purchasing it far below market value.

How did you finance this deal?

Conventional 7-year ARM with 20% down.

How did you add value to the deal?

Significant repairs, including: roofs, flooring, plumbing, electrical, landscaping, drywall, ceiling, and more. We hired a property management company that did a better job of placing tenants than the previous owners had done.

What was the outcome?

We sold the property for $400,000, realizing a capital gain of $104,000 or 11.6% annualized over the holding period. We are doing a 1031-exchange to defer taxes.

Lessons learned? Challenges?

We learned a TON from this property. The biggest lessons were:

- Get an inspection
- Include capital expenses in your analysis
- Be skeptical of ARVs for unusual properties
- Look for properties that are low maintenance. Modern plumbing and electrical, brick exterior, water drains away from house, no large trees near house, etc
- No one will look after your property as well as you want them to. Expect to manage the property manager
- Prune your portfolio when the market is hot

Did you work with any real estate professionals (agents, lenders, etc.) that you'd recommend to others?

I recommend our selling agent, Nancy Bergamon. She did a great job with negotiating the deal.